Tool Kit

Question 1

What are the measures to reduce fiscal deficit?

Answer 1

1. Austerity
2. Supply side policies (interventionist and market-based)
3. Automatic stabilisers (to increase AD -> employment -> tax revenue)

Question 2

What are the measures to reduce inequality and poverty?

Answer 2

1. Market based policy (higher NMW, progressive tax)
2. Interventionist policy (investing into infrastructure and education)

Question 3

Is quantitative easing effective?

What does it impact?

Answer 3

1. Improvement in AD from increased C and I
2. Improvement in AD from exchange rates -> supply shift -> pound weakens -> net trade improves -> AD rises

However
1. Hyperinflation - Weimar Germany

2. Depends on banks, consumers and producer confidence

Question 4

Define Fiscal policy?

Answer 4

Government changes tax revenue, expenditure and borrowing to fulfil its macro-objectives.

Question 5

Define monetary policy?

Answer 5

Central bank changes its interest rate and money supply to fulfil its objectives (e.g. economic growth or control inflation)

Question 6

Define quantitative easing?

Answer 6

Where the central bank purchases financial assets e.g. Government bonds from commercial banks to increase money supply.

Question 7

What are the measures to improve international competitiveness?

Answer 7

1. Weaken the pound
2. Interventionist - Investment in infrastructure, capital tools and human capital
3. Market based - deregulation, lower taxes, subsidies

Question 8

What are typical UK policies against external shocks?

Answer 8

1. Monetary policy (expansionary - Lower IR, boost exports and encourage C and I)
2. Fiscal policy (expansionary - higher GS on Jobseeker’s Allowance, boost AD)

Question 9

What are the measures to control transnational companies?

Answer 9

1. Joint venture with local company (share knowledge and retain some profit within country)
2. Regulate price transfer (Firms operate across borders → internal transactions between subsidiaries occur → artificial prices to shift profits to low-tax countries → reduces taxable income in high-tax countries → governments lose tax revenue → regulation ensures profits are taxed where real value is created → reducing tax loss from transfer pricing

Question 10

What problems do policymakers face?

Answer 10

inaccurate information (Information gap)

risks and uncertainties (unintended consequences)

inability to control external shocks